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Transcript of Decision Ysl v Costco Quality King Third Party Practice
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UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK-----------------------------------X
YVES SAINT LAURENT PARFUMS, S.A. :and YSL BEAUT INC.,
:Plaintiffs, 07 Civ. 3214 (LBS)(HBP)
:-against- OPINION
: AND ORDERCOSTCO WHOLESALER CORPORATION,QUALITY KING DISTRIBUTORS, INC. :and J & H COSMETICS, LTD.,
:Defendants.
:-----------------------------------X
QUALITY KING FRAGRANCE, INC., :
Third-Party Plaintiff, :
-against- :
J & H COSMETICS, LTD., :
Third-Party Defendant. :
-----------------------------------X
PITMAN, United States Magistrate Judge:
I. Introduction
By notice of motion dated July 28, 2008 (Docket Item
67), defendant/proposed third party-plaintiff Quality King
Distributors, Inc. ("QKD") and third-party plaintiff Quality King
Fragrance, Inc. ("QKF") move for an Order pursuant to
Fed.R.Civ.P. 15(a) permitting QKD and QKF to serve an amended
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third-party complaint and an Order pursuant to Fed.R.Civ.P. 21
permitting QKD to add Gerald Schmeltzer as a third-party
defendant. For the reasons set forth below, the motion is
granted in part and denied in part.
II. Facts
This is a trademark infringement action. As originally
commenced, it was limited to claims against Costco Wholesale
Corp. ("Costco") for the alleged resale of lipstick and mascara
bearing trademarks belonging to plaintiffs. The complaint was
subsequently amended to add claims against Costco, QKD and J&H
Cosmetics, Ltd. ("J&H") for infringement with respect to the sale
of OPIUM brand perfume (Second Amended Compl., Docket Item 41).
The Second Amended Complaint alleged that J&H sold counterfeit
OPIUM perfume to QKD, which QKD sold to Costco and which Costco
sold to retail consumers (Second Amended Compl. 27, 29). In
its cross claims against J&H, QKD denied that it had purchased
the perfume in issue but admitted that QKF did purchase the OPIUM
perfume in issue from J&H (Answer and Cross Claims of QKD, Docket
Item 35, 9-10). QKD and QKF asserted cross claims against J&H
for breach of contract, violation of the Section 43(a) of the
Lanham Act 15 U.S.C. 1125(a), false advertising in violation of
the Lanham Act, breach of implied warranty, equitable indemnity,
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equitable contribution, a declaratory judgment that J&H is liable
for any costs QKD or QKF incurred defending against plaintiff's
claims and common law unfair competition. On that same day, QKF
filed a third-party complaint against J&H, asserting on its own
behalf the same cross-claims that had been asserted in QKD's
Answer and Crossclaims (QKF's Third-Party Complaint, Docket Item
42, 42).
Plaintiffs subsequently settled their claims against
Costco, QKD and QKF; the only remaining claims are plaintiffs'
claims and QKD and QKF's claims against J&H. QKD and QKF bring
the present motion to assert claims against J&H and its
principal, Gerald Schmeltzer. Specifically, the proposed amended
third party complaint asserts the following claims on behalf of
both QKD and QKF against both J&H and Schmeltzer: (1) breach of
contract; (2) violation of Section 43(a) of the Lanham Act, 15
U.S.C. 1125(a); (3) federal false advertizing; (4) breach of
implied warranty; (5) equitable indemnity; (6) equitable
contribution; (7) a declaratory judgment that J&H and Schmeltzer
are liable for any costs incurred by QKD and QKF in defending
against plaintiffs' claims, and (8) contribution and indemnity
with respect to the claims against QKD and QKF for common law
unfair competition. J&H and Schmeltzer oppose the motion.
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III. Analysis
A. Standard Applicableto a Motion to Amend
The standards applicable to a motion to amend a
pleading are well settled and require only brief review. Leave
to amend a pleading should be freely granted when justice so
requires. Fed.R.Civ.P. 15(a); Foman v. Davis, 371 U.S. 178, 182
(1962); Dluhos v. The Floating & Abandoned Vessel, Known as "New
York", 162 F.3d 63, 69 (2d Cir. 1998); Satchell v. Dilworth, 745
F.2d 781, 785 (2d Cir. 1984); Gumer v. Shearson, Hamill & Co.,
516 F.2d 283, 287 (2d Cir. 1974). "Nonetheless, the Court may
deny leave if the amendment (1) has been delayed unduly, (2) is
sought for dilatory purposes or is made in bad faith, (3) [would
prejudice] the opposing party . . . or (4) would be futile." Lee
v. Regal Cruises, Ltd., 916 F. Supp. 300, 303 (S.D.N.Y. 1996)
(Kaplan, D.J.), aff'd, 116 F.3d 465 (2d Cir. 1997); accord Am.
Home Assur. Co. v. Jacky Maeder (Hong Kong) Ltd., 969 F. Supp.
184, 187-88 (S.D.N.Y. 1997) (Kaplan, D.J.).
A proposed amended complaint is futile when it fails to
state a claim. Health-Chem Corp. v. Baker, 915 F.2d 805, 810 (2d
Cir. 1990); Mina Inv. Holdings Ltd. v. Lefkowitz, 184 F.R.D. 245,
257 (S.D.N.Y. 1999) (Sweet, D.J.); Parker v. Sony Pictures
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Entm't, Inc., 19 F. Supp.2d 141, 156 (S.D.N.Y. 1998) (Kaplan,
D.J.), aff'd in pertinent part, vacated in part on other grounds
sub nom., Parker v. Columbia Pictures Indus., 204 F.3d 326 (2d
Cir. 2000); Yaba v. Cadwalader, Wickersham & Taft, 931 F. Supp.
271, 274 (S.D.N.Y. 1996) (Koeltl, D.J.); Prudential Ins. Co. v.
BMC Indus., Inc., 655 F. Supp. 710, 711 (S.D.N.Y. 1987) (Sweet,
D.J.); see generally Dluhos v. Floating & Abandoned Vessel, Known
as "New York", supra, 162 F.3d at 69-70. The party opposing the
amendment has the burden of demonstrating that leave to amend
would be futile. Staskowski v. County of Nassau, 05-CV-5984
(SJF)(WDW), 2007 WL 4198341 at *4 (E.D.N.Y. Nov. 21, 2007)("The
party opposing an amendment has the burden of establishing that
leave to amend would be . . . futile."); Lugosch v. Congel,
00-CV-784, 2002 WL 1001003 at *1 (N.D.N.Y. May 14, 2002), citing
Blaskiewicz v. County of Suffolk, 29 F. Supp. 2d 134, 137-38
(E.D.N.Y. 1998).
Leave to amend may be denied as futile "where the claim
or defense proposed to be added has 'no colorable merit.'"
Oliver v. Demarinis & Co., 90 Civ. 7950 (SS), 1993 WL 33421 at *5
(S.D.N.Y. Jan. 29, 1993) (Lee, M.J.) (citation omitted); see also
Ryder Energy Distrib. Corp. v. Merrill Lynch Commodities, Inc.,
748 F.2d 774, 783 (2d Cir. 1984). The 'colorable grounds'
requirement mandates that a district court may not deny a motion
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for leave to amend a pleading when said pleading is sufficient to
withstand a motion to dismiss under Federal Rule of Civil
Procedure 12(b)(6)." Children First Found., Inc. v. Martinez,
04-CV-0927 (NPM), 2007 WL 4618524 at *5 (N.D.N.Y. Dec. 27, 2007),
citing Kassner v. 2nd Ave. Delicatessen, Inc., 496 F.3d 229, 244
(2d Cir. 2007); Estate of Ratcliffe v. Pradera Realty Co., 05
Civ. 10272 (JFK), 2007 WL 3084977 at *4 (S.D.N.Y. Oct. 19, 2007)
(Keenan, D.J.); Journal Publ'g Co. v. Am. Home Assur. Co., 771 F.
Supp. 632, 635 (S.D.N.Y. 1991) (Leisure, D.J.); Prudential Ins.
Co. v. BMC Indus., Inc., supra, 655 F. Supp. at 711 (Although
leave to amend should be freely given, "it is inappropriate to
grant leave when the amendment would not survive a motion to
dismiss."). In assessing the claimed futility of a proposed
amended pleading, the court must assume the truth of the factual
allegations set forth in the proposed amended pleading. Edwards
v. City of New York, 07-CV-5286 (CPS)(RML), 2009 WL 1910740 at *1
(E.D.N.Y. June 29, 2009); Da Cruz v. Towmasters of N.J., Inc.,
217 F.R.D. 126, 128 n.1 (E.D.N.Y. 2003); Binder v. Nat'l Life of
Vt., 02 Civ. 6411 (GEL), 2003 WL 21180417 at *2 (S.D.N.Y. May 20,
2003) (Lynch, D.J.); Gabourel v. Bouchard Transp. Co., 901 F.
Supp. 142, 144 (S.D.N.Y. 1995) (Chin, D.J.).
To survive a motion to dismiss, a plaintiff's "factual
allegations must be enough to raise a right to relief above the
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speculative level . . . on the assumption that all the
allegations in the complaint are true." Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007) (overruling the language of
Conley v. Gibson, 355 U.S. 41, 45-46 (1957) that a motion to
dismiss should not be granted "unless it appears beyond doubt
that the plaintiff can prove no set of facts in support of his
claim which would entitle him to relief"); see also Oliver Sch.,
Inc. v. Foley, 930 F.2d 248, 252 (2d Cir. 1991) (discussing the
standard for denying an amendment as futile prior to Bell
Atlantic); Blaskiewicz v. County of Suffolk, supra, 29 F. Supp.
2d at 138 (same).
The Court of Appeals has also repeatedly noted that the
trial court has "broad" discretion in ruling on a motion to
amend. Local 802, Associated Musicians v. Parker Meridien Hotel,
145 F.3d 85, 89 (2d Cir. 1998); Krumme v. Westpoint Stevens Inc.,
143 F.3d 71, 88 (2d Cir. 1998); see generally Grace v.
Rosenstock, 228 F.3d 40, 53-54 (2d Cir. 2000).
To the extent that a proposed amendment would add new
parties, the motion is technically governed by Rule 21, which
provides that "the court may at any time, on just terms, add or
drop a party," rather than Rule 15(a). Fed.R.Civ.P. 21; FTD
Corp. v. Banker's Trust Co., 954 F. Supp. 106, 109 (S.D.N.Y.
1997) (Stein, D.J.). However, "'the same standard of liberality'
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J&H and Schmeltzer do not address the claims in the1
proposed amended third-party complaint in any logical order. Ishall address the claims in the order in which they appear in theproposed amended third-party complaint, except that I shall grouptogether claims that are subject to the same arguments.
8
applies under either Rule." FTD Corp. v. Banker's Trust Co.,
supra, 954 F. Supp. at 109, citing Fair Hous. Dev. Fund Corp. v.
Burke, 55 F.R.D. 414, 419 (E.D.N.Y. 1972) and Expoconsul Int'l,
Inc. v. A/E Sys., Inc., 145 F.R.D. 336, 337 n.4 (S.D.N.Y. 1993)
(Preska, D.J.); see also Sly Magazine, LLC v. Weider Publ'ns
L.L.C., 241 F.R.D. 527, 532 (S.D.N.Y. 2007) (Casey, D.J.);
Chowdhury v. Haveli Rest., Inc., 04 Civ. 8627 (RMB)(JCF), 2005 WL
1037416 *1-*2 (S.D.N.Y. May 3, 2005) (Francis, M.J.).
J&H and Schmeltzer oppose the motion on the ground that
the proposed amended third-party complaint is futile, that the
application was unduly delayed and that the application is made
in bad faith.
A. Futility1
1. First and Fourth Claims -Breach of Contract andWarranty as to Schmeltzer
J&H and Schmeltzer argue that the first claim, which
alleges breach of contract, should be dismissed as to Schmeltzer
because QKD and QKF do not allege any contractual relationship
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with Schmeltzer and the proposed amended third-party complaint
does not contain factual allegations sufficient to justify
holding Schmeltzer personally liable for the acts of J&H.
The proposed amended complaint does not allege any
contractual relationship between QKD/QKF and Schmeltzer. Thus,
the contractual claims against Schmeltzer are colorable only if
the proposed amended third-party complaint adequately alleges
facts to pierce J&H's "corporate veil."
The doctrine of piercing the corporate veil permits the
owner of a corporation, under certain limited circumstances, to
be held liable for the corporation's obligations, such as the
contract at issue. See, e.g., Morris v. N.Y.S. Dep't of Taxation
& Fin., 82 N.Y.2d 135, 140-41, 623 N.E.2d 1157, 1160, 603
N.Y.S.2d 807, 810 (1993); accord Wm. Passalacqua Builders, Inc.
v. Resnick Developers S., Inc., 933 F.2d 131, 138 (2d Cir. 1991)
("The doctrine . . .is invoked 'to prevent fraud or to achieve
equity.'"), quoting Int'l Aircraft Trading Co. v. Mfrs. Trust
Co., 297 N.Y. 285, 292, 79 N.E.2d 249, 252 (1948); see also JSC
Foreign Econ. Ass'n Technostroyexport v. Int'l Dev. & Trade
Servs., Inc., 306 F. Supp. 2d 482, 485 (S.D.N.Y. 2004) (Koeltl,
D.J.) ("New York courts will pierce the corporate veil 'whenever
necessary to prevent fraud or achieve equity.'"), quoting
Walkovszky v. Carlton, 18 N.Y.2d 414, 417, 223 N.E.2d 6, 7, 276
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N.Y.S.2d 585, 587 (1966). In order to pierce the corporate veil,
there must be a showing that "(1) the owners exercised complete
domination of the corporation in respect to the transaction
attacked; and (2) that such domination was used to commit a fraud
or wrong against the plaintiff which resulted in the plaintiff's
injury." JSC Foreign Econ. Ass'n Technostroyexport v. Int'l Dev.
& Trade Servs., Inc., supra, 306 F. Supp. 2d at 485; see also,
e.g., Freeman v. Complex Computing Co., Inc., 119 F.3d 1044, 1052
(2d Cir. 1997); Thrift Drug, Inc. v. Universal Prescription
Adm'rs, 131 F.3d 95, 97 (2d Cir. 1997); Am. Fuel Corp. v. Utah
Energy Dev. Co., Inc., 122 F.3d 130, 134 (2d Cir. 1997); Am.
Protein Corp. v. AB Volvo, 844 F.2d 56, 60 (2d Cir. 1988); TNS
Holdings, Inc. v. MKI Sec. Corp., 92 N.Y.2d 335, 339, 703 N.E.2d
749, 751, 680 N.Y.S.2d 891, 893 (1998); Morris v. N.Y.S. Dep't of
Taxation & Fin., supra, 82 N.Y.2d at 141, 623 N.E.2d at 1160-61,
603 N.Y.S.2d at 810-11; Lowendahl v. Balt. & Ohio R.R. Co., 247
A.D. 144, 157, 287 N.Y.S. 62, 75-76 (1st Dep't), aff'd, 272 N.Y.
360, 6 N.E.2d 56 (1936).
The determination of whether the corporate veil should
be pierced requires a fact-specific inquiry; there are no bright-
line rules. See MAG Portfolio Consultant, GMBH v. Merlin Biomed
Group LLC, 268 F.3d 58, 63 (2d Cir. 2001); Wm. Passalacqua
Builders, Inc. v. Resnick Developers S., Inc., supra, 933 F.2d at
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139 ("Applying [the relevant] factors to the infinite variety of
situations that might warrant disregarding the corporate form is
not an easy task because disregarding corporate separateness is a
remedy that 'differs with the circumstances of each case.'"),
quoting Am. Protein Corp. v. AB Volvo, supra, 844 F.2d at 60.
New York courts consider the following factors in
deciding whether the requisite domination is present:
(1) the absence of the formalities and paraphernaliathat are part and parcel of the corporate existence,i.e., issuance of stock, election of directors, keepingof corporate records and the like, (2) inadequatecapitalization, (3) whether funds are put in and takenout of the corporation for personal rather thancorporate purposes, (4) overlap in ownership, officers,directors, and personnel, (5) common office space,address and telephone numbers of corporate entities,(6) the amount of business discretion displayed by theallegedly dominated corporation, (7) whether therelated corporations deal with the dominatedcorporation at arms length, (8) whether thecorporations are treated as independent profit centers,(9) the payment or guarantee of debts of the dominatedcorporation by other corporations in the group, and(10) whether the corporation in question had propertythat was used by other of the corporations as if itwere its own.
JSC Foreign Econ. Ass'n Technostroyexport v. Int'l Dev. & Trade
Servs., Inc., supra, 306 F. Supp. 2d at 486, quoting Wm.
Passalacqua Builders, Inc. v. Resnick Developers S., Inc., supra,
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Some of the factors quoted in the text are applicable only2
when the allegedly dominating party is another corporation andare, therefore, inapplicable here.
12
933 F.2d at 139; see also MAG Portfolio Consultant, GMBH v.2
Merlin Biomed Group LLC, supra, 268 F.3d at 63.
In addition, a court will pierce the corporate veil
only when a "fraud or wrong" has been committed. Am. Fuel Corp.
v. Utah Energy Dev. Co., Inc., supra, 122 F.3d at 134 n.2 ("[T]he
New York Court of Appeals held that a conjunctive test was
applicable and required a showing of both domination and fraud or
wrong to justify the piercing of a corporate veil."), citing
Morris v. N.Y.S. Dep't of Taxation & Fin., supra, 82 N.Y.2d at
141, 623 N.E.2d at 1160-61, 603 N.Y.S.2d at 811; EED Holdings v.
Palmer Johnson Acquisition Corp., 228 F.R.D. 508, 512 (S.D.N.Y.
2005) (Sweet, D.J.); Smoothline Ltd. v. N. Am. Foreign Trading
Corp., 00 Civ. 2798 (DLC), 2002 WL 31885795 at *9 (S.D.N.Y. Dec.
27, 2002) (Cote, D.J.); Elgin Sweeper Co. v. Melson Inc., 884 F.
Supp. 641, 652 (N.D.N.Y. 1995) ("[S]ome proof of fraud, whether
actual or intended, must be offered before the court can pierce
the corporate veil."), citing Warner Bros., Inc. v. Gay Toys,
Inc., 598 F. Supp. 424, 430 (S.D.N.Y. 1984) (Knapp, D.J.).
However, proof of the five elements of common law fraud is not
required to fulfill the "fraud or wrong" component. See Rotella
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v. Derner, 283 A.D.2d 1026, 1027, 723 N.Y.S.2d 801, 802 (4th
Dep't 2001) ("A plaintiff is 'not required to plead or prove
actual fraud in order to pierce the corporate defendant's
corporate veil, but [must prove] only that the individual
defendant's control of the corporate defendant was used to
perpetrate a wrongful or unjust act toward plaintiff.'"), quoting
Lederer v. King, 214 A.D.2d 354, 354, 625 N.Y.S.2d 149, 150 (1st
Dep't 1995); see generally JSC Foreign Econ. Ass'n
Technostroyexport v. Int'l Dev. & Trade Servs., Inc., supra, 306
F. Supp. 2d at 486; Smoothline Ltd. v. N. Am. Foreign Trading
Corp., supra, 2002 WL 31885795 at *11.
Assuming without deciding that QKD and QKF have
adequately alleged the first element -- domination and control of
the corporation -- they have not set forth any allegations of
fact suggesting that Schmeltzer used the corporate form to
perpetrate a fraud or other tort. Freeman v. Complex Computing
Co., supra, 119 F.3d at 153 (even where defendant completely
controlled corporation, "New York law will not allow the
corporate veil to be pierced in the absence of a showing that
this control was used to commit wrong, fraud, or the breach of a
legal duty, or a dishonest and unjust act in contravention of
plaintiff's legal rights . . . ." (inner quotes omitted)); see
Badian v. Elliott, 165 F. App'x 886, 889-90 (2d Cir. 2006)
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(second element adequately alleged where plaintiff claimed
individual defendant transferred corporate assets without
consideration to render corporation unable to perform contractual
obligations owed to plaintiff). Although QKD and QKF allege that
J&H breached its contract, there are no allegations that
Schmeltzer used the corporate form to breach the contract or to
frustrate contractual obligations. Use of the corporate form to
avoid personal liability is not improper, see Gartner v. Snyder,
607 F.2d 582, 586 (2d Cir. 1979); Walkovszky v. Carlton, supra,
18 N.Y.2d at 417, 223 N.E.2d at 7, 276 N.Y.S.2d at 587; Bartle v.
Home Owners Cooperative, 309 N.Y. 103, 106, 127 N.E.2d 832, 833
(1955); see generally LeBoeuf, Lamb, Greene & MacRae, L.L.P.
v.Worsham, 185 F.3d 61, 66 (2d Cir. 1999), and even if that were
Schmeltzer's sole reason for doing business through a
corporation, that fact would not justify imposing personal
liability on him.
The same reasoning applies with equal force to the
attempt in the Fourth Claim to assert a claim against Schmeltzer
personally for breach of the implied warranties imposed by the
Uniform Commercial Code.
Because there are no allegations that Schmeltzer abused
the corporate form to perpetrate a wrong on QKD or QKF, the
breach of contract claim and the breach of implied warranty claim
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are futile to the extent they purport to state claims against
Schmeltzer.
2. Second Claim - Violation
of the Lanham Act as toJ&H and Schmeltzer
J&H and Schmeltzer challenge QKD and QKF's claim under
Section 43(a) of the Lanham Act, characterizing it as a claim for
contribution or indemnity. Citing, inter alia, Getty Petroleum
Corp. v. Island Transp. Corp., 862 F.2d 10, 16 (2d Cir. 1988),
J&H and Schmeltzer argue that contribution and indemnity are not
available under the Lanham Act as a matter of law. In reply QKD
and QKF argue that J&H and Schmeltzer mischaracterize their
claim:
J&H misconstrues the Second Cause of Action(Compl. 28-30) as one simply seeking "contributionor indemnification." Incorrect. It is a direct actionunder Section 43(a) of the Lanham Act against both J&Hand Mr. Schmeltzer for damages suffered by QKD and QKFdirectly as a result of J&H and Mr. Schmeltzer sellingthem counterfeit Opium perfume -- it does not seekstate law damages of contribution and indemnification.
(Reply Memorandum of Law in Further Support of Quality King
Fragrance, Inc.'s & Quality King Distributors, Inc.'s Motion to
Amend to Add Gerald Schmeltzer as a Third Party Defendant, dated
September 18, 2008, Docket Item 78, at 6).
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Initially, I note that J&H and Schmeltzer are correct
that the Lanham Act does not provide for claims for contribution
or indemnity. Getty Petroleum Corp. v. Island Transp. Corp.,
supra, 862 F.2d at 16; Akhenaten v. Najee, L.L.C., 07 Civ. 0970
(RJH), 2009 WL 794485 at *2 (S.D.N.Y. Mar. 27, 2009) (Holwell,
D.J.).
Construing their claim as a direct claim, QKD and QKF
lack standing to assert a claim under the Lanham Act. Section
43(a) of the Lanham Act provides in pertinent part:
(a)(1) Any person who, on or in connection withany goods or services, or any container for goods, usesin commerce any word, term, name, symbol, or device, orany combination thereof, or any false designation oforigin, false or misleading description of fact, orfalse or misleading representation of fact, which --
(A) is likely to cause confusion, or to causemistake, or to deceive as to the affiliation,connection, or association of such person withanother person, or as to the origin, sponsorship,or approval of his or her goods, services, orcommercial activities by another person, or
(B) in commercial advertising or promotion,misrepresents the nature, characteristics,qualities, or geographic origin of his or her oranother person's goods, services, or commercialactivities,
shall be liable in a civil action by any person whobelieves that he or she is likely to be damaged by suchact.
15 U.S.C. 1125(a).
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As explained by the Court of Appeals:
To establish standing to pursue a falseadvertising claim under section 43(a)(1)(B), anaggrieved party must demonstrate both (1) "'areasonable interest to be protected against the
advertiser's false or misleading claims,'" and (2) "'areasonable basis for believing that this interest islikely to be damaged by the false or misleadingadvertising.'" Societe Des Hotels Meridien v. LaSalleHotel Operating P'ship, 380 F.3d 126, 130 (2d Cir.2004) (quoting Ortho Pharm. Corp. v. Cosprophar, Inc.,32 F.3d 690, 694 (2d Cir. 1994)). The "reasonableinterest" prong of this test includes commercialinterests, direct pecuniary interests, and even afuture potential for a commercial or competitiveinjury. See PDK Labs, Inc. v. Friedlander, 103 F.3d1105, 1111 (2d Cir. 1997) (citing Berni v. Int'lGourmet Rests. of Am., Inc., 838 F.2d 642, 648 (2d Cir.1988)). The "reasonable basis" prong requires theplaintiff to show "'both likely injury and a causalnexus to the false advertising.'" Havana Club Holding,S.A. v. Galleon S.A., 203 F.3d at 130 (quoting OrthoPharm. Corp. v. Cosprophar, Inc., 32 F.3d at 694).
ITC Ltd. v. Punchgini, Inc., 482 F.3d 135, 169-70 (2d Cir. 2007);
accord Diascience Corp. v. Blue Nile, Inc., 08 Civ. 9751 (NRB),
2009 WL 1938970 at *3 (S.D.N.Y. July 7, 2009) (Buchwald, D.J.).
"Although the plaintiff does not have to be a 'direct competitor'
of the defendant to have standing, it is apparent that, at a
minimum, standing to bring a section 43 claim requires the
potential for a commercial, i.e. 'competitive,' injury." Crab
House of Douglaston, Inc. v. Newsday, Inc., 418 F. Supp. 2d 193,
213 (E.D.N.Y. 2006), quoting Berni v. Int'l Gourmet Rest. of Am.,
Inc., 838 F.2d 642, 648 (2d Cir. 1988). Thus, "consumers
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generally lack standing to sue under Section 43(a) of the Lanham
Act." Itakura v. Primavera Galleries, Inc., 08 Civ. 9027 (HB),
2009 WL 1873530 at *3 (S.D.N.Y. June 30, 2009) (Baer, D.J.),
citing, inter alia, Colligan v. Activities Club of N.Y., Ltd.,
442 F.2d 686, 692 (2d Cir. 1971).
QKD and QKF do not allege anything suggesting a
commercial or competitive injury. There is nothing in their
proposed amended third-party complaint that suggests J&H and
Schmeltzer's offering allegedly counterfeit OPIUM perfume caused
or potentially caused QKD or QKF to suffer competitive injury.
To the contrary, their putative direct claim against J&H and
Schmeltzer is indistinguishable from a consumer's false
advertizing claim; i.e., they were told and believed they were
purchasing genuine OPIUM perfume and instead they received a
counterfeit product.
Thus, QKD and QKF's proposed Lanham Act claim is futile
as to both J&H and Schmeltzer.
3. Third Claim - FalseAdvertising inViolation of the Lanham Act
J&H and Schmeltzer next claim that QKD and QKF's claim
for false advertising in violation of the Lanham Act is futile
because QKD and QKF lack standing to seek relief for such a
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claim. In principle part, J&H and Schmeltzer argue that QKD and
QKF allege only the injury that a consumer of a falsely
advertized product suffers.
QKD and QKF's false advertizing claim reads in its
entirety as follows:
31. QK Fragrance and QKD repeat and reallege theallegations of all of the preceding paragraphs asthough fully set forth herein.
32. Assuming the allegations of the Complaint tobe true, then J&H and Schmeltzer (as J&H's moving,active and conscious force), in connection with thesale of the alleged counterfeit products, used a word,term, name, symbol, or device or any combinationthereof, or a false designation of origin, false ormisleading description of fact or false or misleadingrepresentation of fact, which in commercial advertisingor promotion, misrepresented the nature,characteristics, qualities or geographic origin of thealleged counterfeit products. Such conduct constitutesa violation of 15 U.S.C. 1125(a)(1)(B).
33. QK Fragrance and QKD have been and continueto be damaged by J&H's and Schmeltzer's above-statedactivities and conduct, in an amount to be proved attrial.
(Ex. A to Declaration of Andre K. Cizmarik, dated July 25, 2008
("Cizmarik Aff."), Docket Item 68, at 31-33). Among the
preceding allegations in the proposed amended third-party
complaint are allegations that QKD, QKF and J&H are all engaged
in the wholesale purchase and sale of fragrances (Ex. A to
Cizmarik Aff. at 1, 2, 4).
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To state a claim for a violation of the Lanham Act
based on false advertizing, a plaintiff must allege that "(1)
defendants made a false or misleading representation regarding
the nature, characteristics or quality of plaintiff's [or
defendant's] services; (2) the representations were used in
commerce; (3) the representations were made in the context of
commercial advertising or promotion; and (4) defendants' actions
made plaintiff believe it would be damaged by the
representations." Gmurzynska v. Hutton, 257 F. Supp. 2d 621, 629
(S.D.N.Y. 2003) (Berman, D.J.), aff'd, 355 F.3d 206 (2d Cir.
2004), citing National Artists Mgm't Co., Inc. v. Weaving, 769 F.
Supp. 1224, 1230 (S.D.N.Y. 1991) (Conboy, D.J.).
"[T]o constitute 'commercial advertising or promotion'
under the Lanham Act, a statement must be: (1) 'commercial
speech,' (2) made 'for the purpose of influencing consumers to
buy defendant's goods or services,' and (3) 'although
representations less formal than those made as part of a classic
advertising campaign may suffice, they must be disseminated
sufficiently to the relevant purchasing public.'" Gmurzynska v.
Hutton, 355 F.3d 206, 210 (2d Cir. 2004), quoting Fashion
Boutique of Short Hills, Inc. v. Fendi USA, Inc., 314 F.3d 48,
56, 57-58 (2d Cir. 2002).
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QKD and QKF's false advertising claim fails to allege
facts sufficient to sustain several elements of the claim. There
is no allegation that J&H and Schmeltzer made false statements in
commerce nor are any facts alleged which, if true, would
establish that the allegedly false statements constituted
commercial advertising or promotion. Although paragraph 32 of
the proposed amended third-party complaint contains the legal
conclusion that J&H and Schmeltzer made false statements "in
commercial advertising or promotion," Twombly teaches that, in
order to survive a Rule 12 motion, facts supporting this
conclusion must be alleged.
Thus, I conclude that QKD and QKF's proposed claim for
false advertising in violation of the Lanham Act is also futile.
4. Fifth and Sixth Claims -Equitable Indemnityand Equitable Contribution
J&H and Schmeltzer argue that QKD and QKF's Fifth and
Sixth Claims for equitable indemnity and equitable contribution
should not be permitted because they are redundant of the Second
and Eighth claims and fail for the same reasons as those claims
fail. As explained below, the Eighth Claim is not futile.
Accordingly, assuming the Fifth and Sixth Claims are redundant of
the Eighth Claim, they are not futile.
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J&H and Schmeltzer also argue that the claims for
contribution and indemnity do not accrue until QKD or QKF has
actually expended funds to either satisfy a judgment or to pay a
settlement and they are, therefore, not yet ripe for
adjudication. In addition to being contrary to controlling
precedent, this argument, if accepted, would effectively repeal
Fed.R.Civ.P. 14. As explained in a leading treatise,
Rule 14 allows defendant to implead one "who ** * may be liable to the third-party plaintiff forall or part of plaintiff's claim." The words "may beliable" mean that the defendant is permitted to joinsomeone against whom a cause of action has not yetaccrued, provided that the claim is contingent upon thesuccess of plaintiff's action and will accrue whendefendant's liability is determined in the main actionor plaintiff's claim is satisfied."
6 Charles A. Wright, Arthur R. Miller, Mary K. Kane, Federal
Practice & Procedure 1451 at 405-06 (2d ed. 1990). Numerous
cases in this Circuit have recognized that a third-party
plaintiff may assert a third-party claim before it has actually
incurred liability or made a payment so long as the claim against
the third-party defendant arises out of the same transaction and
the third-party defendant may be liable to the third-party
plaintiff for the latter's liability to plaintiff. St. Paul Fire
& Marine Ins. Co. v. U.S. Lines Co., 258 F.2d 374, 376 (2d Cir.
1958); Lamberson v. Washington Int'l Ins. Co., 93 Civ. 471 (MBM),
1993 WL 524855 at *2 (S.D.N.Y. Dec. 16, 1993) (Mukasey, D.J.);
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Gross v. Hanover Ins. Co., 138 F.R.D. 53, 55 (S.D.N.Y. 1991)
(Leisure, D.J.); Olmstead v. Fed. Ins. Co., 84 Civ. 1696 (MJL);
1984 WL 583 at *1 (S.D.N.Y. June 29, 1984) (Lowe, D.J.); Monarch
Indus. Corp. v. Am. Motorists Ins. Co., 276 F. Supp. 972, 980
(S.D.N.Y. 1967) (Motley, D.J.).
Finally, J&H and Schmeltzer argue that "'where, as
here, a defendant asserts as an affirmative defense that any
damages awarded to plaintiffs should be reduced due to
plaintiffs' culpable conduct, that defendant cannot also maintain
a third-party action against' the third-party 'upon which the
culpable conduct defense is based'" (Memorandum of Law in
Opposition to Quality King Fragrance, Inc.'s and Quality King
Distributors, Inc.'s Motion to Amend to Add Gerald Schmeltzer as
a Third-Party Defendant, dated August 28, 2008, Docket Item 75,
at 6, quoting Ruszkowski v. Sears, Roebuck & Co., 188 A.D.2d 967,
968, 592 N.Y.S.2d 115, 117 (3rd Dep't 1992)). The case upon
which J&H and Schmeltzer rely arose in the context of an
employee's personal injury action and it is doubtful that is has
any applicability here. Nevertheless, assuming without deciding
that the principle cited by J&H and Schmeltzer could be
applicable here, J&H and Schmeltzer ignore the fact that there is
no pleading filed by QKD or QKF in which they assert that
plaintiffs' claimed injuries are due to the plaintiffs' own
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culpable conduct. The factual predicate for the argument is
missing.
Thus, J&H and Schmeltzer have not demonstrated that the
Fifth and Sixth Claims of the proposed third-party complaint are
futile.
5. Seventh Claim - DeclaratoryJudgment as to Schmeltzer
Schmeltzer claims that the claim for a declaratory
judgment against him is futile because all the substantive claims
against him are futile. However, because J&H and Schmeltzer have
not succeeded in demonstrating that all substantive claims
against Schmeltzer are futile, the factual predicate for this
argument is lacking.
6. Eight Claim - Contributionand/or Indemnity withRespect to the ClaimsAgainst QKD and QKF forCommon Law Unfair Competition
Relying on Lurzer GMBH v. American Showcase, Inc., 73
F. Supp. 2d 327, 331 n.5 (S.D.N.Y. 1998) (Rakoff, D.J.), J&H and
Schmeltzer next argue that the proposed Eighth Claim, which seeks
contribution and indemnity with respect to the common law claim
against QKD and QKF for unfair competition, is futile because a
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common law unfair competition claim is identical to a Section
43(a) claim. Although Lurzer does indicate that the elements of
the two claims are "almost indistinguishable," it does not
address the question of whether indemnity and contribution are
available with respect a common law claim for competition. 73 F.
Supp. 2d at 331 n.5. Indeed, other cases in the Circuit have
expressly recognized that a party sued for common law unfair
competition can assert a claim for contribution and, if it is
without fault, a claim for indemnity. Too, Inc. v. Kohl's Dep't
Store, Inc., 213 F.R.D. 138, 140-44 (S.D.N.Y. 2003) (Marrero,
D.J.).
J&H and Schmeltzer also argue that to the extent the
eight claim is brought on behalf of QKD it should be dismissed
because there were no transactions between QKD and J&H. This
argument is unavailing because the proposed amended third-party
complaint alleges that "J&H sold various quantities of Opium
perfume to QK Fragrance and/or QKD, which was thereafter sold to
Costco" (Ex. A Cizmarik Aff. at 24). As noted above, in ruling
on a motion to amend, the truth of the allegations in the
proposed amended complaint must be assumed. Edwards v. City of
New York, supra, 2009 WL 1910740 at *1; Da Cruz v. Towmasters of
N.J., Inc., supra, 217 F.R.D. at 128 n.1; Binder v. Nat'l Life of
Vt., supra, 2003 WL 21180417 at *2; Gabourel v. Bouchard Transp.
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Co., supra. 901 F. Supp. at 144. Thus, J&H and Schmeltzer's
argument must be rejected because it attempts to contradict the
allegations in the proposed amended complaint.
Because J&H and Schmeltzer bear the burden of showing
futility, Staskowski v. County of Nassau, supra, 2007 WL 4198341
at *4, and they have not done so, QKD and QKF's motion is granted
to the extent they seek to add a claim for indemnity and
contribution with respect to the claims asserted against them for
common law unfair competition.
C. Delay and Bad Faith
J&H and Schmeltzer also argue that the motion for leave
to file the amended third-party complaint should be denied on the
grounds of delay.
Delay alone, in the absence of prejudice, is not a
sufficient reason to deny a motion to amend. Rachman Bag Co. v.
Liberty Mut. Ins. Co., 46 F.3d 230, 234-35 (2d Cir. 1995); Middle
Atl. Until. Co. v. S.M.W. Dev. Corp., 392 F.2d 380, 384 (2d Cir.
1968). J&H and Schmeltzer make no showing that they have been
prejudiced as the result of any claimed delay.
J&H and Schmeltzer also argue that QKD and QKF's motion
to amend is made in bad faith because Schmeltzer is in ill
health. Although Schmeltzer's ill health is unfortunate, it does
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not, of course, clothe him with immunity from suit. I find thatSchmeltzerts ill health does not, as a matter of logic, supportan inference that the motion is made in bad faith.
IV. Conclusion
Accordingly, QKD and QKFts otion is granted to theextent they seek to file an amended third-party complaint alleg-ing (1) breach of contract and breach of warranty claims againstJ&H, (2) claims against J&H and Schmeltzer for equitable contri-bution and equitable indemnity, (3) a claim against J&H andSchmeltzer for a declaratory judgment and (4) a claim against J&Hand Schmeltzer for contribution and indemnity with respect to thecommon law unfair competition claims asserted against QKD or QKF.In all other respects, QKD and QKFts otion is denied.Dated: New York, New York
June 24, 2010SO ORDERED
HENRY PITMAUnited States Magistrate Judge
Copies transmitted to:John Maltbie, Esq.Louis S. Ederer, Esq.Arnold & Porter, LLP399 Park AvenueNew York, New York 10022
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Andre K. Cizmarik, Esq.Edwards Angel1 Palmer & Dodge, LLP750 Lexington AvenueNew York, New York 10022
Jeffrey T. Heller, Esq.Somer & Heller, LLPSuite 3502171 Jericho TurnpikeCommack , New York 11725